What is the effective interest rate

Reference no: EM13180766

1. John Davis, a recent IE graduate from Tennessee Technological University, bought an SUV for $30,000 with a down payment of $10,000. John had a little business on the side and did not have a girlfriend when he was at school and hence he was able to save the $10,000 for his dream car. He expects to take good care of the car and the dealership, owned by John's uncle, agrees to take the car back for $8,000 at the end of 4 years.

a. If the monthly payment is $400, what is the nominal interest rate on this loan?

b. What is the effective interest rate?

2. Fancy Gadgets, Inc. has developed a new Thing-A-May-Jig at a cost of $2,000,000. Projected profits from the sale of Thing-A-May-Jigs for the next five years are: $300,000, $400,000, $500,000, $600,000, and $250,000. At the end of the fifth year, the production equipment associated with the Thing-A-May-Jig project will be disposed of for $750,000. Determine the rate of return for the Thing-A-May-Jig project.

3. Barry, a Texas Crude Company engineer who did not take Engineering Economy while studying at Tech, recommended that Texas Crude purchase a special tool to reduce the cost of pumping oil out of the bayous of St. Martin Parish. As a result of Barry's recommendation, Texas Crude purchased the tool for $30,000 on January 1, 2005.

By January 1, 2006, the tool had saved a total of $5,000 and went on line full time. After going on line full time, the tool saved Texas Crude $9,000 each year for the next three years and Barry was happy. However, Barry recommended the "el-cheapo" model, and it started breaking down during the early part of year five, and ended up by saving only $4,000 during year five.

It was scrapped as being unusable at the end of year five, and had a zero salvage value. Barry told his boss that his recommendation had been correct, as it had saved Texas Crude $6,000 and that is a savings of 20%.

Use a MARR of 10% and evaluate the effectiveness of the tool and the correctness of Barry's recommendation.

4. A 10-year, 12%, $1,000 bond that pays dividends quarterly can be purchased for $900. If the bond is purchased and pays as scheduled,

a. what nominal rate of return will the purchaser receive?

b. what effective rate of return will the purchaser receive?

Reference no: EM13180766

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